Blockchain Technology Implementation: Bitcoin

A Blockchain is a chain of blocks which contains information. Blockchain technology is a structure that stores transactional records, also known as the Block. Blocks are connected in the network through peer-to-peer nodes. The data which is stored inside a Block depends on the type of Blockchain. For example, a Bitcoin Block contains information about the sender, receiver, and number of Bitcoins to be transferred. The first Block in the chain is called the Genesis block. No one owns Blockchain technology, although the different organizations can own specific and individual Blockchains.

 

There are lots of real-life implementation of Blockchain technology. Here, I am taking an example of Bitcoin to understand it better. It is well known that Blockchain technology can be used to build cryptocurrencies; Bitcoin is a working example of this. Blockchain technology enables electronic transactions that are resilient even when large amounts of money are at stake.

 

What is Bitcoin?

 

Money has changed several times in history. For society to accept something as money, it should be scarce, divisible, durable and portable. Bitcoin is a cryptocurrency: the world's first global decentralized digital currency. It is a digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. People buy Bitcoins to use it to make payments to friends, family and merchants, and as an investment. Bitcoin is the future of money. Bitcoin was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto and started in 2009 when its source code was released as open-source software.

 

How Bitcoin Works?

 

Bitcoins are stored in your digital wallet and can be easily accessed by using any mobile device or computer. So you can transfer money anywhere in the world, and you don't have to worry about banks and forex agents. It transfers instantly with minimal charges. World's most prominent companies started accepting Bitcoins. The Bitcoin network is now hundreds of times more powerful than hundreds of supercomputer of the world combined. Bitcoin companies are established all over the world. Bitcoin prices keep changing, just like other commodities or currencies. Nobody owns the Bitcoin network.

 

New Bitcoins are generated by a competitive and decentralized process called "Mining". This process involves that individuals are rewarded by the network for their services. Bitcoin Miners are processing transactions and securing the network using specialized hardware and are collecting new Bitcoins in exchange.

 

Bitcoin network is secured by individuals called "Miners". They verify transactions and newly generated Bitcoins. Transactions are recorded at transparent public ledger called Blockchain. Miners maintain four copy of each transaction. On the other hand, the bitcoin ledger is open. Everyone can see the transactions happening in the bitcoin network. However, the transactions cannot be directly linked to a person or a company. Bitcoin has opened a whole range of new platforms for innovation. The software is an entirely open-source, and anyone can check the source code. Over one billion investment has taken place in Blockchain companies.

 

Advantages of Bitcoin

 

·       It is fast: Paying by cheques, international money transfers and other traditional forms of payments take a longer time, generally a couple of days. Credit cards are instant to pay. But it takes longer for the merchant to receive the money in their account. With Bitcoins, transactions are almost instantaneous. Bitcoin is the fastest way to transfer money.

 

·       It's cheap: For all existing forms of payment, you have to pay a fee to the bank, Credit card company or the payment processing company. With Bitcoins, the transaction fee is minimal and cheaper than all traditional payment systems. For micropayments, bitcoin is the first feasible payment system.

 

·       No central control: Bitcoin is decentralized. No central authority has control over it. So no authority can devalue it.

 

·       There are no chargebacks: For merchants using credit cards, especially for merchants selling digital goods, the chargeback is a substantial risk. Once a Bitcoin transaction is done, cannot be reversed. This avoids chargeback frauds.

 

·       People can't steal your information from merchants: You must have heard that your data has been stolen from large retailers and companies. This is because when you pay by credit card, the merchant has all your personal information. Bitcoin transactions are like cash. You can send Bitcoins without giving your personal information.

 

·       Security: It is decentralized nature, and the cryptographic algorithm makes it immune to attack. Hacking a Blockchain is close to impossible. In a world where cybersecurity has become a vital issue for personal, corporate, and national security, Blockchain is a potentially revolutionary technology.

 

·       You own it: With traditional money, you never own the money. It's either owned by the bank or by the payment processing company. If they decide to freeze your accounts, you cannot do much. You have control over your Bitcoins. You own your Bitcoins.

 

Inflation: Another problem with the current monetary system is, it is not secure. However, due to reducing interest rates, vast amounts of new money enters the economy.  This reduces the purchasing power of the capital, this is called inflation. Unlike the national currency, Bitcoins are limited. Only 21 million Bitcoin will be created ever for circulation. Fourteen million Bitcoins have been mined so far. So if the price of Bitcoin goes up, each unit can be further divided into eight decimal points. This means each bit can hold 10 million pieces, and it is highly portable like cash, gold and any tangible asset.

 

Risks of Investment in Bitcoin

 

·       Bitcoin is a very high-risk investment. Price of Bitcoin is very volatile. At one point in time, the rate of bitcoin changed from RS. 42000 to RS. 320000 per Bitcoin in just nine months.

·       Bitcoin E-Wallet and Bitcoin Transactions are not regulated by RBI or Indian Government

·       Bitcoin is not an asset; it's like cash, but any underlying asset like gold does not back Bitcoin.

·       You need to invest in the safekeeping of large amounts of Bitcoin

·       New York University has called bitcoin the "mother of all bubbles."

·       Many people are still unaware of Bitcoin. So the degree of acceptance is low.

·       Many other Crypto-currencies are circulated, some names are Litecoin, Ethereum and Monero.

 

With the number of Bitcoins having a fixed limit while more and more of the world joins in, the law of demand and supply will dictate the price which will continue to rise. However, this is still a relatively new technology and does pose technical and legal challenges. In the end, one should not invest in anything one does not understand.